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Market Power, Fully Revealing Prices and Welfare

This paper considers a dynamic duopoly market with strategic, price setting firms and an infinite set of fully rational, privately informed consumers who enter the market sequentially. I show that there exists a sequential equilibrium in which prices converge to their realized product qualities with probability one, hence perfectly aggregating the privately held information. This fully revealing equilibrium is shown to be welfare inferior to a fixed price equilibrium in which perfect information aggregation might fail. Therefore, one has to be careful not to equate fully revealing prices with welfare optimality.